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ONE OF IRELAND’S bailed-out banks will probably fail Europe-wide “stress tests” when results come out on Sunday – but that doesn’t mean the system is about to come crashing down again.

The European Banking Authority tests will put about 130 of the region’s biggest banks through a doomsday picture of shrinking GDP, falling property prices and big unemployment hikes to see how they would cope if the world’s major economies plunged into a deep recession.

While the biggest of Ireland’s bailed-out lenders, Bank of Ireland and Allied Irish Banks (AIB), look in good shape to pass the tests, there is a good chance Permanent TSB (PTSB) will come up short in the worst-case scenario.

To pass the tests, banks essentially have to show they have enough low-risk assets in reserve that they could suffer another major shock like the global financial crisis.

PTSB expected to fail test

Several analysts have earmarked PTSB as being in danger of failing the tests. It would then have nine months to raise extra money to show the European Central Bank it would be sound after suffering another financial shock.

The bank received €4 billion in bailout funds from the taxpayer in 2011 and the state now owns over 99% of the lender, although the long-term plan has always been to eventually sell its stake into private hands again.

University College Cork’s Seamus Coffey said the biggest risk to the public if PTSB failed the test would come if it had to sell equity to raise more money, diluting the taxpayer-owned share and reducing its value.

“PTSB has been very slow in getting back to operating profitability because of the nature of its loan book,” he told TheJournal.ie.

“But I think it would be far more significant of there were concerns about AIB or the Bank of Ireland, given that they’re the big players.

The stress test isn’t revealing any new losses or next black hole in the banks – it’s simply saying if there was to be a further crisis, PTSB isn’t in a strong position to deal with it.”

Risky loans being sold off

Meanwhile, PTSB has been busy offloading many of its riskiest assets in the lead-up to the tests and today it announced it was selling €468 million in loans tied to its subsidiary Springboard Mortgages.

Chief executive Jeremy Masding said the transaction was “an important part of (the company’s) planned deleveraging program” and it was not appropriate for the bank to hold on to the loans while it was focussed on rebuilding.

The Springboard book was made up of non-conforming loans – or loans which fell outside normal bank lending criteria – and the bulk were either in default or had payments long overdue.

After the Budget last week, Finance Minister Michael Noonan said both Bank of Ireland and AIB were “very secure” ahead of the assessments and PTSB was also strong.

But he said if the bank needed to raise any more money after the tests it should be able to get it from the market without hitting up the taxpayer again.

The government currently holds €400 million in so-called contingent convertible notes for PTSB. These are a type of bond which automatically become a further stake in the company if a specific trigger event happens – in this case, if the share of the bank’s total portfolio that is made up of its most secure assets drops below a fixed percentage.

In a briefing note today, Davy Research analyst Emer Lang said any extra fundraising the bank had to carry out was “likely to be limited” because the notes provided PTSB with some cover.

PTSB expects to be turning a profit again by 2017 as house prices rebound and the number of borrowers who are behind on their repayments drops.

Big enough to fail

As many as 18 banks across Europe could fail the tests, according to some experts, although the exercise could have a positive impact on markets after all the recent volatility.

A separate report from Spanish newswire EFE said 11 banks had failed the tests, but the European Central Bank said no final results had been sent out yet.

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